What is a mortgage guarantee and how do banks manage risk?

The mortgage guarantee plays a key role in the banking system by protecting financial institutions from the risk of borrower default. If the borrower defaults, the bank can use the property collateral to repay the loan. A mortgage guarantee, executed by a notary and registered with the land registry, is one of the main risk management tools in banking. It allows banks to ensure repayment of funds by minimising losses if the borrower fails to comply with the terms of the contract.

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What is a mortgage guarantee? 

A mortgage guarantee is a ‘real security’ that involves a pledge of a property. If the borrower defaults on a payment, the bank attempts to collect the debt out of court by offering to spread the debt over several instalments. If there is no resolution, the bank seizes the property and sells it. This is a regular mortgage that is granted by the borrower, unlike a judicial mortgage that arises from a court order.

Having a mortgage does not restrict the owner's rights to dispose of the property. The owner can live in the house, make repairs, sell or rent it out. A mortgage on a plot of land automatically covers the buildings that will be erected on it. The mortgage guarantee is drawn up by a notary and registered in the property register of the Land Registry.

Surety and mortgage guarantees: Differences and conditions of use

Usually banks prefer to provide a deposit instead of a mortgage guarantee, and this is because a guarantee is easier and quicker to arrange. But there are some circumstances in which a bank guarantee cannot be used. Let's take a look at when this can happen:

• If the bank guarantee is refused by the guarantor organisation based on the results of the review of the borrower's application;
• If the home loan is a combination of a social housing loan and a zero-rate loan;
• If the amount of the social housing loan taken out to finance the purchase exceeds the limit.

As to the difference between a mortgage guarantee and a pledge - these are two bank guarantees provided by the lending institution to ensure the return of the amounts provided in the event of the borrower's default. In practice, with a mortgage guarantee, the bank recovers its funds through the sale of the property and vice versa, as with a bank guarantee, the guarantor undertakes to repay the lending institution instead of the borrower. In practical terms, in order for the guarantee to be validated, the borrower pays a guarantee fee proportional to the amount of capital raised. Let us consider how this payment is distributed:

• One part is paid as remuneration to the organisation for services rendered;
• The second part is deposited into a mutual guarantee fund, which is used to compensate the bank in the event of borrower default.

The cost of a mortgage guarantee and the terms of the mortgage exemption

A mortgage guarantee is executed with a notary public and involves several types of costs. These include notary fees, real estate transaction registration tax, administrative fees and a property preservation fee. The total of these costs is usually around 1.5% of the loan amount. For example, a couple taking out a €300,000 mortgage will pay these additional fees.

The mortgage guarantee is valid for the duration of the loan and remains at the Land Registry for a further year after repayment. After that, the registration ceases to be valid at no additional cost. However, if necessary, the mortgage guarantee can be removed early with the payment of a certain fee, which is calculated by the notary.

The release of the mortgage requires notarisation and a fee is also charged. The Paris Chamber of Notaries provides a tool to calculate this fee. You can use such services to find out in advance how much you will have to pay for a mortgage release.

When can a mortgage be discharged and how do I know if there is a guarantee?

A mortgage is discharged when the borrower pays off the loan early. This is possible if the property is sold, the loan is transferred to another bank or additional funds are obtained. The early repayment fee cannot exceed six months interest or 3% of the loan balance, depending on the terms and conditions.

To check whether a mortgage guarantee exists on a property, the land registry must be contacted. The enquiry is paid for and a certificate of encumbrance status is then provided. This is especially important when buying a home, as the property must be sold free of liens. If the mortgage is still active, selling the property can be difficult as new buyers will want a clean deal with no additional loan obligations.

Conclusions: Mortgage guarantee and how do banks manage risk?

The mortgage guarantee is an important risk management tool for banks, protecting them in the event of borrower default. Banks actively use this mechanism to minimise risk by retaining the ability to recover debt through the sale of collateral. It is important for borrowers to consider the costs associated with a mortgage guarantee, as well as the terms of early repayment of the loan. Therefore, it is worth understanding these aspects in order to better navigate the mortgage loan process and be able to ensure the transparency of the transaction.